The Dow logged its seventh straight drop, while the Nasdaq snapped
its five sessions winning streak. The S&P 500 broke out of a very
tight consolidation pattern, but still managed to close with a loss of
less than 1%. WTI crude oil erased an early gain and closed down 1.1%
at a four-month low.

Consumers boosted spending
by 0.4% in June — the third straight strong increase — but they’ve also
been saving less to fund their purchases. Income growth has not been
keeping pace with spending. Incomes rose 0.2% in June for the second
straight month.

As a result, the personal-savings rate dropped to 5.3%
and matched a 15-month low. Savings had hit a four-year high earlier in
the year. Inflation as measured by the PCE index edged up 0.1% in June.
The PCE index, the Federal Reserve’s preferred inflation barometer,
increased 0.9% in the 12 months ended in June. That’s unchanged from in
the prior month.

The annual rate of core inflation was also flat at
1.6%. Although inflation has been creeping higher lately, there still
are no signs of widespread price pressures in the U.S. economy.

CoreLogic
reports home prices were 5.7% higher in June compared to a year ago,
and prices were up 1.1% from May to June. They forecast a 5.3% increase
in home prices over the next year. Including distressed sales, national
single family home prices remain 6.7% below peak values recorded in
April 2006. Mortgage rates dipped in June to their lowest level in more
than 3 years. Among major metro areas, Denver had the lowest
unemployment rate and the strongest home price appreciation. Arizona saw
a 5.5% increase in home prices over the past 12 months.

Japanese Prime Minister Shinzo Abe’s
cabinet approved a $274 billion stimulus package. The Bank of Japan
last week only tweaked its monetary stimulus. By total size, the
stimulus package ranks among Japan’s biggest since the global financial
crisis, but three quarters of the stated value comprises targeted
low-interest loans from the government and state-owned companies. The
program will include money for infrastructure projects, including a
magnetic-levitation train line connecting Tokyo and Osaka, as well as
reconstruction projects in the southern region hit by earthquakes in
April. It also will pay for cash handouts to 22 million low-income
people.

The Federal Reserve reports
loan standards to commercial and industrial firms and commercial real
estate tightened for the fourth straight quarter in the three months
ended in June. The survey also found standards on all categories of
residential real estate mortgage loans were little changed, except some
easing for loans that can be bought or guaranteed by Fannie Mae and
Freddie Mac. The report also showed that demand for most types of
residential real estate loans strengthened over the second quarter.

Major automakers
in the U.S. market reported July vehicle sales slightly below
expectations as the pent-up demand that has helped drive sales since
2009 plays itself out. In a continuing trend, consumers shunned
passenger cars in favor of SUVs and pickup trucks. GM sales dropped 2%.
Ford sales slipped 3%. Fiat Chrysler sales rose 0.3%. Nissan reported a
1.2% increase. Honda surprised with a 4.4% increase. Ford shares dropped
4.3% today and are down 14% in the last 4 sessions.

Shares in Biogen
jumped almost 10% today, after the Wall Street Journal reported that
Merck and Allergan have each informally expressed interest in a possible
acquisition. A takeover of Biogen would be the biggest of a biotech
company since 2008, and one of the largest takeovers by a drug
company on record. Biogen makes drugs that treat multiple sclerosis and
hemophilia, and its main focus overall is on neurological and autoimmune
diseases, as well as rare diseases.

Pfizer said it has reached a $486 million
settlement of shareholder litigation accusing it of causing big losses
for shareholders by concealing safety risks associated with its Celebrex
and Bextra pain-relieving drugs. Pfizer pulled Bextra from the U.S.
market in April 2005, and agreed in September 2009 to pay $2.3 billion
to settle a U.S. government probe into the marketing of Bextra and other
drugs. The accord is subject to negotiation of a final settlement
agreement and court approval, and would end more than 11 years of
litigation against the drug maker.

Also, Pfizer reported
better-than-expected quarterly results, driven by lower taxes and sales
of generic medicines, but revenue from its array of branded
patent-protected medicines brought disappointment. Pfizer did not offer
any hints on whether it plans to split into two separate companies, a
long-mulled potential decision that has kept investors in suspense.

Of the 353 companies in the S&P 500 that have reported earnings
through Tuesday morning, 71 percent have topped analyst expectations,
according to Thomson Reuters data. Earnings for the second quarter are
expected to show a decline of 2.6 percent, an improvement from the
expected 4.5 percent decline on July 1.

Emerson Electric,
which makes factory automation equipment, said it would sell two units
for a total of $5.2 billion as the company focuses on its high-growth
businesses. Emerson will sell its network power unit to investment firm
Platinum Equity in a deal worth $4 billion, while Japan’s Nidec Corp
will buy its motors and electric power division for $1.2 billion.

Australia cut rates to a record low. The
Reserve Bank of Australia lowered its benchmark interest rate to a
record-low 1.50%, as expected. The central bank’s board noted “that
prospects for sustainable growth in the economy, with inflation
returning to target over time, would be improved by easing monetary
policy at this meeting.”

European bank stocks were crushed again today.The
sector remains under pressure after the results of the European Banking
Association stress tests were released after markets closed on Friday.
Europe’s STOXX Banking Index traded lower by 2.8%, taking this year’s
total losses to more than 30%; with Germany’s Commerzbank pacing today’s
decline among individual names, down 8.2% after reporting a 32% drop in
quarterly profits.

Credit Suisse and Deutsche Bank – will be dropped
from the STOXX 50, an index of Europe’s top 50 blue-chip companies next
week. Credit Suisse and Deutsche Bank shares have lost half their value
this year. Exclusion from a benchmark generally means that
exchange-traded funds and other passive investors that track the index
will be forced to sell the shares.

Deutsche’s plight should be of
particular concern. Its shares are now worth barely a quarter of its
book value. That is a twofold bind: proof that investors distrust the
bank; and a practical block on being able to raise the equity needed to
boost regulatory capital and absorb the cost of fines; and Deutsche
faces considerable fines. Investors are again pricing in a risk that
the bank’s coco (or
contingent convertible) bonds will be bailed in. Last month, the
International Monetary Fund issued a report that concluded Deutsche is
probably “the most important net contributor to systemic risks in the
global banking system”.

And as bad as that is, the worst of the lot, is Italy’s Banca Monte
dei Paschi, which utterly failed the stress test last week and now
requires recapitalization. The Financial Times reports:
“The proposal is being presented as “the last bailout” for Monte dei
Paschi, with the expectation that, if the lender cleans up its bad
loans, it will become a takeover target. Still, senior bankers admit it
is highly risky and will prove a tough sell to drum up support for the
recapitalization with the bank’s past history of burning investors.
Bankers do not rule out that, if the recapitalization fails to find
enough buyers, Monte dei Paschi may be forced to swap some of its debt
for equity.”

The only good news is that Monte dei Paschi is nowhere near
as big as Deutsche Bank. Italy is turning into the next Greece.
Non-performing bank loans have risen to 18% in Italy. Monte dei Pachi
has non-performing loans around one-third of its assets. I’m not sure
how this plays out but it will probably be messy.

The Centers for Disease Control and Prevention advised pregnant women not to go to a Miami neighborhood where
new, confirmed cases of Zika virus that appeared to be locally
transmitted were reported. It was the first time the government health
agency tasked with preventing the spread of disease has issued such an
advisory for the Zika virus within the 48 contiguous US states, and it
appeared to be the first time the CDC has warned against visiting any
part of the continental United States for health reasons.

The warning
applied to a one-square-mile area north of downtown Miami. Despite the
narrowness of the warning, it may be problematic for Florida’s important
tourism industry. The state drew in more than 100 million visitors and
generated more than $89 billion of economic activity last year

At the end of last year,
the FAA mandated—arguably as a stopgap against potentially stricter
regulations from Congress about how citizens can use drones—that anyone
wishing to fly a consumer drone weighing more than a half pound needed
to get a registration number from the FAA for $5.

At a conference at the White House today
on the future uses of drones in US airspace, Federal Aviation
Administration director Michael Huerta told the gathered crowd that more
than consumer 500,000 drones had been registered with the agency since
December. According to the FAA,
it took 100 years for about 320,000 regular aircraft to be registered
with US officials—a feat that drones have surpassed in a matter of
months.

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